Innovation Risk: Tesla’s Groundbreaking Sales Model Hits a Roadblock


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The battery-powered 2013 Tesla Model S accelerates from 0 – 60 in just under four seconds—one second slower than the gas-swilling 2013 Lamborghini Aventador LP700-4 Roadster. Yet, Tesla’s encore innovation, a factory direct-to-consumer supply-chain model, has not yet found an open lane. The company’s strategy to bypass a dealer network faces powerful detractors.

“Tesla believes it should be allowed to sell cars without licensed dealers. This can’t be . . . Automaker Tesla can be as innovative as it is capable of being, but this has nothing to do with protecting car buyers, let alone service customers. For these things, a dealer network, licensed by the state, is required. If Tesla won’t have a dealer network, it doesn’t belong in the automobile business,” Gerard Murphy, president of the Washington Area New Auto Dealers Association wrote in response to a June 14, 2013 editorial in The Washington Post, A Bump in the Road for Tesla.

“It’s a consumer protection . . . and why we say that a dealer who has invested a significant amount of capital in a community is more committed to taking care of that area’s customers,” said Bob Glaser, president of the North Carolina Automobile Dealer’s Association, whose mission statement, “to use our collective power to proactively preserve, protect and enhance the economic life, relationships and image of our members and the association itself,” possibly reveals a truer representation of Mr. Glaser’s allegiances. Amid pressure from dealers, North Carolina seeks to ban even Internet sales of the Tesla.

According to Diarmuid O’Connell, Tesla’s vice president of business development, “This would be the first place to my knowledge that Internet-based communications with our company would be circumscribed . . . Most consumers would laugh at the notion that they’re better served by the existing system,” adding that the dealers’ true interest is maintaining total control over retail.

Mr. O’Connell has a point. Car dealers have achieved an unenviable superlative: the business that consumers complain about the most. Not an easy task, considering the other industries that contended for this top, or rather, bottom slot—cable television companies, cellular phone services, banks, and collection agencies at second, third, fourth, and fifth places, respectively. So Mr. Glaser’s knock that Tesla could erode consumer protections sounds about as sincere as a member of the Taliban asserting that a government policy might unfairly compromise women’s rights.

Protected by state laws, car dealers have not suffered the wrath of e-commerce disruption painfully familiar to other retailers, from booksellers to electronics stores. For the most part, Tesla has circumvented state sales restrictions by operating twenty-nine stores and galleries in fourteen states and Washington, DC. Customers can’t order a car online at the galleries and Tesla personnel are restricted from promoting purchases, but customers in any state can buy online, since the sales legally take place in California.

“I’m kind of pleased that Tesla has gotten as far as it’s gotten,” said Francine Lafontaine, a University of Michigan economist specializing in franchising. Tesla could lobby for a federal law or a ruling from federal courts, according to Tesla’s VP O’Connell. That could include making a case based on the Constitution’s Commerce Clause, which stipulates only Congress can regulate interstate commerce. Courts have contended that the Commerce Clause forbids discriminating against out-of-state companies—good news for Tesla.

But Steve Schwinn, a professor of constitutional law at the John Marshall Law School, said making such a case could prove difficult. He referenced a 2001 Circuit Court decision involving Ford Motor Company versus the state of Texas. The court rejected Ford’s claim that Texas state law violated the Commerce Clause when it prevented Ford from selling used cars through its own website.

Outside of state lobbyists with vested interests in auto dealerships, few can argue that offering consumers an alternative buying channel would be a bad idea. But as Robert C. Merton wrote in Harvard Business Review, (Innovation Risk—How to Make Smarter Decisions, April, 2013), “The benefits and risks of an innovation are determined not just by the choices people make about how to use it but by the infrastructure into which it is introduced. . . The bottom line is that any innovation involves a leap into the unknowable. If society is to progress, however, that’s a fact we need to accept and to manage.”

Further reading: Is Tesla’s Customer Experience Driving Car Dealers Over the Edge?, by Michael Hinshaw

Republished with author's permission from original post.


  1. The licensed dealer network was established in reaction to gaps in information and communication across distances in a time when ‘long distance’ communications meant a phone call to Grandma’s house, 20 miles away. It also was conceived to address the perception (valid perception?) that automobile dealers were highly challenged in regards to ethics. And so, the industry, in cahoots with the bureaucracies of government, larded on a layer of regulation. As if that made it all better.
    It’s a different time, and a different scenario, and an industry outsider is seeking to change the information equation in such a way that information that is known is provided to the consumer in order to make good decisions, and back to the dealer so that effective and efficient service and repairs can be effected.
    Regrettably, it the same old song and dance for those burdens on society who have enjoyed their ‘fat o’ the land’ existence as administrators and executives of auto dealer organizations. No benefit is conferred on the population at large, nor the sub-population of the automobile consumer. But a few, accustomed to skimming the profit to live comfortably, have a problem with an efficient change in the industry.
    Auto Dealer Associations provide no service; effect no consumer protection; add no value to society or the economy. In fact, by the very existence of the layers of bureaucracy that consume resources from the automobile industry value chain, Dealer Associations cost every one of us who is an automobile consumer. Dealer Associations’ days are done, and it’s time for them to sunset.

  2. Jim: thanks for taking the time to comment. What’s especially telling about the auto dealer association websites is how little attention is paid to consumer relations. On North Carolina’s dealer website, search on ‘consumer’, and you get a document ‘A Dealer Guide to Consumer Leasing.’ – but nothing else.

    Searching other terms, such as ‘advocacy’ and ‘ombudsman’ yield no results. I would have searched further, but the website even ratchets down on that: ‘You are only allowed to search every 15 seconds.’ Really? I’ve never encountered that before.

    Odd to think that by using the cover of protecting consumer rights, NCADA has been among the most vociferous opponents of Tesla’s direct-to-consumer model.


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